Senate Panel Weighs Wider Private Capital Access, Investor Safeguards

Senators examining ways to expand access to investment capital agreed Thursday that more Americans and small businesses should be able to participate in financial markets. They disagreed, however, on whether loosening federal rules would broaden opportunity or expose households to investments for which they may struggle to evaluate the risk or complexity.

The Senate Committee on Banking hearing, “Empowering Main Street by Unlocking Access to Capital,” centered on how Congress can help smaller companies raise money and give ordinary Americans more investment choices without weakening the disclosures, enforcement and market rules designed to protect them.

Contrasting Views

Committee Chair Tim Scott, R-South Carolina, framed capital formation as a Main Street concern, rather than a Wall Street abstraction. He said entrepreneurs outside established financial centers often face greater difficulty finding investors and argued that opportunity should not depend on geography or existing wealth.

Scott said Congress should make it easier for companies to grow, enter the public markets and remain publicly traded. He pointed to bipartisan proposals involving emerging-growth companies, retirement plans and business development companies—which provide financing to small and midsize firms.

Senator Elizabeth Warren, D-Massachusetts, the committee’s ranking Democrat, offered a sharply different diagnosis. She argued that investor confidence depends on strong and consistent enforcement. She accused President Donald Trump’s administration and the leadership of the Securities and Exchange Commission of favoring wealthy and politically connected market participants.

Warren also raised concerns about pending legislation concerning digital assets, saying decentralized finance platforms performing functions similar to traditional brokers or exchanges should be subject to the same amount of oversight. That legislation, the Clarity Act, would create a regulatory framework delegating the authority to regulate digital assets to be shared between the SEC and the Commodity Futures Tradition Commission, but the legislation has lost Democratic support.

For instance, the bill would allow cryptocurrency exchanges to offer “rewards” for banking-like services, which angered bankers. Democrats pushed hard for ethics provisions that would limit how much members of Congress and the president could gain from digital assets while in office. The debate even caused a stir after a recent column by the editorial board of the Wall Street Journal criticized the bill.

A brief released by Warren separately argued that provisions of the proposed Clarity Act could limit anti-money-laundering, sanctions and registration authorities, particularly involving decentralized cryptocurrency mixers. Mixers—or tumblers—per Warren, “commingle illicit funds with monies from other sources which makes any investigation and potential seizure more difficult for law enforcement.”

Cost and Complexity

The witnesses reflected the broader divide.

Dalia Blass, a former director of the SEC’s Division of Investment Management and now a partner in law firm Sullivan & Cromwell, said ordinary investors have lost access to some high-growth opportunities as companies now tend to remain private for longer periods. The landmark shift to employee-directed defined contribution retirement accounts from traditional pension funds, she said, has also reduced many workers’ indirect exposure to private assets.

Blass urged regulators to permit more retirement products that hold less-liquid investments and to improve the SEC process for approving new investment vehicles. Applications involving novel products can take years to resolve, she said, raising costs and limiting competition.

Kenneth Bentsen, president and chief executive of the Securities Industry and Financial Markets Association, emphasized the importance of reversing the long-term decline in public listings. Public companies, he said, can tap larger pools of capital while providing investors with more liquidity, transparent pricing and disclosure than most private companies.

The 2012 JOBS [Jumpstart Our Business Startups] Act created an “emerging growth company” category and reduced some disclosure and compliance requirements when qualifying businesses go public. The SEC has since continued to consider how those thresholds and accommodations should apply as companies grow and inflation changes their size.

Mike Flood, a senior vice president at the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, told senators that the cost and complexity of becoming a public company outpace the benefits for too many businesses. He said he supports updating regulatory thresholds, expanding crowdfunding and correcting what industry groups describe as the double counting of BDC expenses in fund disclosures.

The Role of Business Development Companies

That technical BDC issue drew some of the hearing’s most significant interest from both sides of the aisle. Supporters say changing the disclosure treatment could make BDC shares more attractive to investors and could channel additional financing to smaller businesses. Critics of broader private-market expansion nevertheless stressed that any revisions should preserve meaningful information disclosure about fees and risk.

Cantrell Dumas, a senior researcher at the Joint Center for Political and Economic Studies, warned lawmakers against measuring success of disclosure changes only by the total amount of money raised. Congress should also examine who receives capital, on what terms and with what protections, he said, as Black-owned firms continue to encounter significant financing barriers, a pattern documented repeatedly in Federal Reserve research.

Dumas said households with less accumulated wealth have less ability to absorb losses, excessive fees and fraud. He urged Congress to strengthen community development financial institutions, minority depository institutions and federal small-business programs while maintaining reliable disclosures and enforcement.

Access vs. Safeguards

Several senators focused on narrower proposals that may offer a path toward legislation.

Senator Katie Britt, R-Alabama, promoted a bill that would allow certain 403(b) retirement plans used by teachers, hospital employees and nonprofit workers to offer collective investment trusts more readily. Such trusts are already common in 401(k) plans and can provide lower-cost investment options by pooling assets.

The legislation has been widely supported by the retirement industry, as evidenced by 30 industry chief executives signing a joint letter asking Congress to pass the bill.

However, while the provision is popular, the INVEST [Incentivizing New Ventures and Economic Strength Through Capital Formation] Act—the legislative package that includes the provision CITs allowing in 403(b) plans—includes several provisions on capital market access that has been wholly unpopular with Senate Democrats, putting the bill in jeopardy.

The committee now faces the task of translating the balance between greater access and proper safeguards into legislative action, likely in the form of trying to pass—or amend—the current bills on the docket.

However, with the Senate entering its month-long recess next week, and peak midterm election season approaching, it could make it difficult for any of the bills to pass in this Congress, which concludes at the end of the year.